Perfect Competition versus Pure Monopoly 331In the last decade, OPEC has prospered due to a combination of steadily
increasing oil demand and limited supply. The surge in demand has been led
by the rapid economic growth in China and India and surprisingly strong con-
sumption in the United States. Supply disruptions in Venezuela and Nigeria
and severe reductions in oil from Iraq have contributed to supply shortfalls. In
response to increasing demand, OPEC pursued a profit-maximizing strategy,
raising its official supply quota from 24 mbd in 2003 to 26 million barrels mbd
in 2005 and ultimately to nearly 30 mbd in early 2008. Average crude oil prices
climbed steadily, exceeding $40 per barrel in 2004, $60 per barrel in 2005, and
$90 per barrel in 2007 before exploding to well over $100 per barrel in mid- Surging demand put OPEC in a no-lose situation. Although many OPEC
members overproduced their individual quotas (overproduction was some 2.5
mbd in total during early 2008), prices remained stable.
But the onset of the global recession in the fall of 2008 and the slow eco-
nomic recovery over the next three years have sharply curtailed worldwide oil
demand and caused oil prices to fall as low as $40 per barrel in 2009.
Beginning in late 2008, OPEC agreed to slash its total production from 29.0
million barrels per day to 24.8 mbd. Table 8.1 shows the breakdown of output
quotas for OPEC members. The adherence to the lower total quota (and a
sharp cutback in oil from civil war-torn Libya) helped maintain and buoy aver-
age oil prices to above $80 per barrel in 2010 and 2011. However, in 2011
OPEC as a whole was overproducing its quota by some 4 million barrels per
day. It remains to be seen whether persistent flaunting of quotas will lead to
significant erosion in oil prices.
TABLE 8.1
Production Quotas of
OPEC Members
(December 2010)Quotas are expressed
in millions of barrels of
oil per day.Algeria 1.20
Angola 1.52
Ecuador 0.43
Iran 3.34
Kuwait 2.22
Libya 1.47
Nigeria 1.67
Qatar 0.73
Saudi Arabia 8.05
UAE 2.22
Venezuela 1.99
Total 24.84
(Iraq does not currently abide by OPEC quotas.)c08Monopoly.qxd 9/29/11 1:31 PM Page 331